Document (8) PDF - Limited Company Accounts

## Lesson 7 - Limited Company Accounts in Published Format ### IAS 16 Property, plant and equipment The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment so that users of financial statements can determine the entity's investment in non-current assets....

## Lesson 7 - Limited Company Accounts in Published Format ### IAS 16 Property, plant and equipment The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment so that users of financial statements can determine the entity's investment in non-current assets. It sets out the criteria for the recognition of the assets, the calculation of their carrying values and the treatment of depreciation and impairment losses. IAS 16 sets out a number of definitions: - **Property, plant and equipment**: assets that are held for use in the production or supply of goods and services which are expected to be used for more than one period. - **Depreciable amount**: the cost of the asset less its residual value. - **Depreciation**: the systematic allocation of the depreciable amount over the useful life of the asset. - **Useful life**: the length of time that the asset is expected to be in use. - **Residual value**: the net amount that the entity expects to be able to sell the asset for at the end of its useful life. - **Carrying value**: the amount at which the asset is held in the Statement of Financial Position after deducting accumulated depreciation and impairment losses. - **Fair value**: the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Many of these terms will be familiar to you from earlier studies. Items of property, plant and equipment are to be recognised as assets when it is probable that future economic benefits will flow to the entity and the cost of the asset can be measured reliably. Once an asset is disposed of (sold) it is derecognised, by being removed from the Statement of Financial Position. IAS 16 permits two alternative treatments for property, plant and equipment. It allows such assets to be held either at cost less depreciation or at fair value. Property, plant and equipment are initially measured at cost in the Statement of Financial Position. Cost includes purchase price, plus any costs incurred in bringing the asset to its present location and condition. This might include expenses such as import duties, costs of site preparation, delivery and installation costs, testing and assembly costs, borrowing costs and professional fees for engineers and architects. Costs which are specifically excluded from the definition of cost include general administrative and start-up costs such as advertising and promotional costs. Once the assets have been capitalised on the Statement of Financial Position, their depreciable amount will be written off systematically over their useful lives. The entity has a choice of depreciation methods and can select the most appropriate rate for each class of asset separately. The depreciation method selected must be reviewed annually to ensure that the policy remains appropriate. You will be expected to be able to calculate depreciation adjustments using straight-line and reducing balance methods. Freehold land is held at cost and not depreciated. All other non-current assets should be depreciated. An entity may opt to hold its non-current assets at fair value. This involves revaluing the assets at regular intervals and the creation of a revaluation reserve. This was covered in Lesson Two and should be reviewed again now. Assets held at fair value must be reviewed regularly to ensure that the carrying value equates to fair value. If necessary the value of the asset must be impaired if the fair value is lower than the carrying value. Impairment is similar to depreciation and an impairment loss is an expense in the Statement of Profit or Loss. IAS 16 also sets out the disclosure requirements for property, plant and equipment in the financial statements. For each class of property, plant and equipment the notes to the financial statements must disclose: - The measurement basis used to determine the carrying amount. This will be cost or fair value. - The depreciation method used. - The useful lives of the assets or the depreciation rates. - The gross carrying value and the carrying value at the beginning and end of the accounting period. - A reconciliation of the movements in carrying value at the beginning and end of the accounting period. This will include: - Additions. - Disposals. - Revaluation increases and decreases. - Additions acquired through business combinations. - Impairment losses. - Depreciation. #### Example The following information has been extracted from the accounting records of Sivitor Ltd in respect of non-current assets. | At 1 January 201X | Cost | Accumulated depreciation | Depreciation policy | |---|---|---|---| | Land | 800,000 | | No depreciation | | Buildings | 950,000 | 228,000 | 4% per year straight line | | Plant | 400,000 | 294,000 | 20% straight line; full year charge in year of acquisition, none in year of disposal | | Motor vehicles | 86,000 | 37,624 | 25% reducing balance; full years charge in year of acquisition, none in year of disposal | Sivitor Ltd has decided to revalue its land and buildings at 31 December 201X and has obtained a fair market valuation of £2,000,000. During the year plant with a cost of £120,000 and accumulated depreciation of £102,000 was disposed of and replaced by plant costing £95,000. Two motor vehicles with a combined cost of £39,624 were purchased during the year. These replaced two vehicles with an original cost of £17,600 each and accumulated depreciation at 1 January 201X of £7,700 each. **Required** Prepare a suitable working to show the movements on non-current assets for the accounting period ended 31 December 201X. **Solution** Begin by entering the balances for cost and accumulated depreciation at January 201X. Next include the additions and disposal adjustments for cost and accumulated depreciation. These can be taken straight from the question data but remember that two motor vehicles were disposed of so the cost to be deducted is 2 x £17,600 = £35,200. Similarly the accumulated depreciation needs to be calculated for two motor vehicles 2 x £7,700 = £15,400. Depreciation for the year can now be calculated as follows and entered into the working: Buildings: 4% x £950,000 = £38,000 Plant: £400,000 - £120,000 + £95,000 = £375,000 x 20% = £75,000